MI 2022 PU3 Preliminary Examination Paper 1 Answer Guide

1 2022 H2PAA Pu3 Prelim Paper 1 Answer guide Question 1 (a) Categories Transaction Total assets Profit Working capital Equity Increase Decrease Increase Decrease Increase Decrease Increase Decrease (i) 3 340 3 340 3 340 3 340 (ii) 1 000 1 000 1 000 1 000 (iii) 480 20 20 20 (iv) 50 000 50 000 50 000 (b) Computation of profit available for distribution to ordinary shareholders. $ Net profit before interest 100 000 Less: Interest expense (6% X 400 000) 24 000 Net profit 76 000 Less: Preference dividend (8% X 400 000) 32 000 Profit for distribution as ordinary dividends 44 000 (c) Gotham Hot Wheels Gears Debt – Equity Ratio 66.67% 42.86% 0 Total liabilities/ Total Equity 400 000/ 600 000 300 000/700 000 0/1 000 000 Gotham is the most highly geared as it has the highest debt – equity ratio of 66.67%. (d) ▪ Risk of not being able to generate enough profits to cover interest costs which is a mandatory expense and hence make a loss. ▪ Risk of not being able to repay its interest and debt when they fall due which may result in a company being forced into liquidation ▪ Risk of fluctuation in EPS ▪ Risk of not being able to obtain more loan capital (e) In years of high profits, it will be better to be an ordinary shareholder are entitled to share larger profits as there will be more profits available for distribution as ordinary dividends after paying fixed interest expense and preference dividends. For bondholders, the interest received is fixed regardless of the profits earned. (f) Trade unions/Management/Lenders/Suppliers/Government/General Public

2 Question 2 (a) Swee Silk Limited Statement of Cash Flows for the year ended 31 March 2022 Cash flows from operating activities $’000 $’000 Net profit for the year before interest [240 +60] 300 Adjustments for : Depreciation (12.5% X 280 000) 35 Loss on disposal (15 - 20) 5 Operating cash flows before movements in working capital 340 Increase in inventory (170) Increase in trade receivables (110) Increase in trade payables 79 (201) Net cash provided by operating activities 139 Cash flows from investing activities Deposit for PPE (30) Purchase of non-current assets (280) Proceeds from sale of non -current assets 15 Net cash used in investing activities (295) Cash flows from financing activities Proceeds from loan 400 Issue of share 70 Repayment of old loan (10) Repayment of new loan (60) Interest paid (60) Dividends paid (20+20) (40) Net cash provided by financing activities 300 Net decrease in cash and cash equivalents 144 Cash and cash equivalents at beginning of the year (54) Net decrease in cash and cash equivalents 144 Cash and cash equivalents at end of the year 90 (b) Overall, there was a improvement in the company’s cash resources from an overdraft of $54 000 to a positive balance of $90 000. Cash from operations tied up in inventory & receivables.